• Interest Rate Manipulation and Loose Money Promote Economic Collapse

Few people would compare downward central bank interest rate manipulation and loose money policies to Soviet style command economics. But I do. And I suggest that if these policies continue for much longer, it could lead to an economic collapse, something approaching that of the Soviet Union’s in the late 1980s. Consider the outcomes for the United States of excessively low interest rates and loose monetary policies in recent years fostered by the U.S. Federal Reserve:

• A real estate boom and bust, with massive over-building.
• Discouragement of savings which fell to all-time lows relative to incomes.
• The taking of inordinate financial risks.
• The creation of excessive debt, particularly by consumers.
• The expansion of total debt far faster than either GDP or income.

Furthermore, the Japanese experience with many years of zero-based interest rates and easy money has enormously compounded its economic problems. Here is the situation in Japan today:

• Japan cannot raise interest rates in any meaningful way due to its gargantuan public debt. To do so could bankrupt the nation. The country is trapped into lower rates.
• Until recently, Japan had become the financier of ultra cheap plentiful loans that artificially boosted global asset prices. The so-called ‘yen carry-trade’, and, its recent collapse has helped crush global asset values.
• Zero-based rates combined with major monetary expansion smashed down Japan’s exchange rate, making imports expensive and discouraged balanced domestic consumption.
• A ‘cheap’ Yen gave Japanese exporters an unfair trade advantage relative to other developed economies, particularly that of the United States.
• Japan has failed to pull itself out of an almost twenty-year slump.
• Japan has produced a situation of significantly diminished resources to fight its present downturn, not only due to the enormity of its government debt, but also because of deteriorating savings in recent years and lack of domestic consumer demand.

With central bank rates of zero per cent proving inadequate to get individuals and companies borrowing, and banks lending again, governments now seek to lower their bond yields. Thereby rates for mortgages, auto loans, consumer loans, etc., are also manipulated down, hoping to kick-start consumption. Hence, the U.S., Japanese, British and other central banks are engaged in a massive ‘printing money’ exercise to buy huge quantities of their respective governments’ bonds in an effort to lower their bond yields and create the easy money. Such policies usually have the following outcomes:

• If successful, debt levels go from really bad to extremely bad!
• Short-term artificial demand stimuli distort longer term supply/demand relationships. Look what has happened to the American auto industry arising from zero-cost financing a few years ago. It appears that much of the increased sales was at the expense of future consumption and has helped shape the horrendous situation for the industry today.
• Financial and economic imbalances mount, producing an ever more unstable economic environment. As Stephen Roach, Chairman of Morgan Stanley Asia, wrote on March 10, 2009 in the Financial Times, “Policies are being framed with an aim towards recreating the boom. Washington wants to get credit flowing again to indebted US consumers… It is a recipe for disaster.”

Economies with excessively loose monetary policies and who force interest rates to ultra low levels for extended periods of time eventually succumb to a massive top-heavy debt structure which at some point ‘topples over.’ These countries then suffer either a deflationary debt implosion/depression in which much of the debt is liquidated, or the country’s central bank instigates a huge inflationary push to reduce the value of all credit market debt in the country by vastly increasing the amount of currency and the expansion of its money supply.

A big inflationary push frequently leads to a lack of confidence in the country’s currency and hence the possibility of ‘hyper-inflation’ occurring as everyone unloads the country’s currency for real goods or other currencies. Argentina earlier this decade and Zimbabwe recently, are examples of central bank sponsored inflation that led to no confidence in their currencies, resulting in hyper-inflation. The inflationary approach is what appears to be favoured by the American, Japanese and British central banks.

From an Enlightened Economics perspective, the actions of manipulating down interest rates and the over printing of money by central banks fall under a terrible fallacy: the belief that we can resolve our short-term economic problems by going more into debt and not concern ourselves with the long-term consequences. A global consciousness has to arise which understands that manipulating markets, most especially interest rates and money supply, leads to highly unstable economies which in time either implode or explode!

Sometime in the next few years we will again learn history’s lesson concerning long periods of ultra-low interest rates and loose money. And the lesson is that by artificially enforcing such policies for extended periods of time leads to an inevitably unwieldy mammoth debt structure that eventually crushes the economy. As I mentioned at the beginning of this piece, it is comparable in my view to that of the Soviet command economy which finally imploded after trying for decades to make it work.

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• ‘Voluntary Simplicity’ Brings Higher Consciousness into Economics

A sweeping new consumer frugality is enveloping the developed world bringing higher consciousness into economic affairs. Some call it ‘voluntary simplicity.’ And it ties in well with my thesis that as a more balanced, higher consciousness arises in consumers, their consumptive and savings habits will change significantly and more sustainably. Thus, I believe the age of Enlightened Economics is ahead us.

Voluntary Simplicity defined

The term voluntary simplicity (VS) according to the Simple Living Network is first thought to have been used by “Richard Gregg who, in 1936, was describing a way of life marked by a new balance between inner and outer growth.” Some might argue that numerous people are being forced into VS-as the unemployed might be, for instance. There is some truth to that. Nonetheless, I believe that most of us are sensing a new reality dawning in the consumptive habits of almost everyone around us.

For example, more and more people in developed countries are realizing that their lives have become so dominated by material possessions that the caring, maintenance and use of some of these possessions take too much of their time, energy and money! (i.e. ‘McMansions,’ large homes for just two or three people are going out of style.) They are also realizing that many of these products are damaging to the environment. Thus, a degree of frugality is coming to be seen by countless numbers of people as the way forward. It is important to understand though, that this VS style of living is not to be compared with an agrarian ‘back to nature’ lifestyle, nor related to material impoverishment.

The Simple Living Network states that the values underlying VS are: material simplicity, human scale, self-determination, ecological awareness, and personal growth. These personal values are often attributed to individuals of higher consciousness, and mesh well with the understanding of Enlightened Economics, which believes that with rich inner development of our minds will come the ability to fulfill our individual and collective economic aspirations.

The exact numbers of individuals abiding by the VS lifestyle, either knowingly, or unknowingly, are not known. But it is apparent that its ranks are growing fast. Evidence of this is seen in the cutting back of material consumption, increased spending on education, and a deepening interest in the environment, personal growth and spirituality.

Modern economies lose their way as happiness fades

Economics should be about assisting us in fulfilling our dreams while allowing us to enjoy great happiness and fulfillment in life. However, as practised today economics is sorely lacking in achieving such goals. In fact, when looking at measures of happiness, authoritative research by Dr. Robert Lane of Yale University, shows happiness actually declines as GDP grows! Other studies such as the one by Prof. Arthur A. Stone, of Stoney Brook University School of Medicine, demonstrate that happiness is unrelated to income.

People in developed countries everywhere are beginning to understand the deep flaws of a modern life based principally on the acquisition of material possessions. Hence, our lifestyles are increasingly favouring the nourishment of our subjective values and inner development, over outer material goods.

The coming era of voluntary simplicity

VS lifestyles encourage more entrepreneurship, independence, self-employment, the purchase and manufacture of sustainable products and services, lower debt levels, reduced consumption, and higher savings rates plus a tendency to save and pay cash for purchases. (For related reading, see my editorial on the Investing for the Soul website, Everyone Becoming A Cultural Creative.)

With society favouring qualitative and subjective values related to lifestyle, there will be considerably less emphasis on the Gross Domestic Product (GDP) statistic. This statistic simply totals the market value of all final goods and services sold. New economic measures that include quality of life factors will become the norm. These other measures might include the Calvert-Henderson Quality of Life Indicators, the Genuine Progress Indicator (GPI), the Index of Sustainable Economic Welfare (ISEW), and variants of them.

The economic transformation giving rise to voluntary simplicity

Almost nobody in the mainstream economic community predicted our present circumstances, illustrating the deplorable state of economics in our institutions today. They naively believed it was fine for debt to grow exponentially while incomes stagnated and savings crashed. And then they wondered why the consumer stopped spending and acting more frugally. It’s amazing how such brilliant minds could get it so very wrong. It was primarily only those (like myself) adhering to the ignored and maligned Austrian School of economics who largely got it right.

People in developed countries are increasingly favouring more non-material growth that is founded on higher inner values, knowledge, simplicity and sustainability. They will not abandon material joys, but the emergence of VS is telling us that long-held so-called economic ‘truths’ are shattering before us. An age of Enlightened Economics is being born.

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• Short-Term Thinking Created Economic Pain

Short-term unbalanced thinking has gotten us economic pain. The dangers of short-term thinking in economic matters became particularly evident to me in the late 1990s. At that time I said to colleagues that if the U.S. does not change its course, it is heading towards major economic difficulties. I made that statement after studying the trends of many economic statistics, particularly those of debt accumulation and savings rates.

Illustrating the short-term thinking at its worst is the current dire situation of Detroit’s Big Three auto makers.

In 2001, I quoted Maryann Keller, a top auto industry analyst in my still unfinished book, Investing for the Soul. She said in a Forbes article that year, “[That] Chrysler, GM and Ford spent billions of dollars to buy their stock in the open market since the mid-1990s… It was always obvious that product spending [developing new autos] was being sacrificed to provide trading liquidity [ease of selling stock] for big investors while boosting earnings per share. GM, Ford and the Chrysler Group today [remember this was 2001] find themselves with growing gaps in their product portfolios as they lose market share…”

Short-termism pervades current thinking in economics, finance and business. Examples of this are everywhere. In economics, the U.S. Federal Reserve is always trying to fine-tune interest rates to effect relatively short-term changes. In finance, managers of ‘long-term’ mutual funds turnover their portfolios more than 100% a year (refer to page 18) as they are primarily evaluated on their latest quarterly results. In business, many CEOs who want to embed in their companies’ long term beneficial environmental, social and governance (ESG) actions—are handicapped by investors looking for short-term gains.

Even today, the financial bailouts are ad hoc arising from the immediate financial market chaos. However, over the next year it will become apparent that this short-term oriented government borrowing and spending binge will not solve the basic long-term problem of excessive debt. In fact, it only adds to it. Every family knows that you cannot forever borrow more than you earn and spend your way out of debt.

Soon, the U.S.A. will have to face-up to the reality that, either willingly or coerced, it will have to save more and spend less. It would be best if this could happen gradually over say, seven to ten years. That might well have been possible in the 1990s. But today though, it is unlikely as many consumers have hit the ‘debt wall.’ Unable (or unwilling) to borrow, they are reducing their spending significantly.

I believe next to hit the debt wall will be numerous businesses in the first half of 2009 followed by the possibility of the U.S. government itself, perhaps in the final six months of that year. Then a new reality will dawn in the minds of Americans and people everywhere. Their thinking will have to change.

Very few economists and financial market participants attempt to understand the connection between our thought processes and economic behaviour. Yet it is so obvious! The only permanent way out of this mess is for people everywhere to gain an inner sense of balance and well-being while developing their creativity and intelligence to earn more.

Such balanced, developed individuals will not sacrifice their longer-term material and spiritual goals for short-term gains like a drug addict needing an immediate ‘fix.’ This is the central, unacknowledged task, for individuals everywhere amidst this economic turmoil. When accepted, it will usher in an age of Enlightened Economics and bring unprecedented global affluence.

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• U.S. Personal Savings Rate To See Big Gains

There is good news coming. Americans are about to save more, much more. A new consciousness is dawning. It is one that brings enhanced balance to Americans material and inner personal lives as they re-evaluate their futures due to changed circumstances. Boomers approaching retirement are seeing their homes decline in value, their stock market investments in difficulty, and concerned about government support—are realizing the importance of savings as never before.

Recently, U.S. tax-payers received up to $600 in cash from their government. It seems that Americans are choosing to save it. In May 2008 the savings rate as a percentage of personal disposable income shot-up to 4.9% and in June to 2.5%. This occurred after the rate was near zero for about three years and the lowest since 1933. These higher savings rates are just the beginning of a trend that I believe will crest with savings rates in excess of 10% in the next few years.

Higher savings rates will eventually create a new economic equilibrium and allow for vigorous economic expansion. However, until this new economic equilibrium emerges, the increased savings rates have some downsides. It begins with a significant reduction in consumer expenditure. The U.S. is the world’s leader among developed countries in having the highest consumption relative to its gross domestic product (GDP). Stephen Roach of Morgan Stanley shows that U.S. consumption is about 71% of GDP, compared to 56-57% in most other developed countries. The U.S. average for the years 1975–2000 was 67% of GDP, and for 1950-1975 around 64%. Now the U.S. is likely to head back to the latter figure.

Why Americans will save more
Another consequence of lower consumption will be further downward pressure on Americans most important asset – their homes. Until recently, Americans saw their homes as the safe place to invest in and build equity for retirement. But they now understand this strategy may not work well in the future. Purchasing a home for investment purposes will be de-emphasized. Home prices are likely to fall even further, scaring particularly those boomers to save in other ways.

In addition, declining consumption could mean even lower stock market returns than even the abysmal ones seen in recent years. Adrian Ash in his article, The Decade of No Returns, says, “… the total return [capital gains and dividends] on the S&P500 [the pre-eminent U.S. large companies stock index] was actually negative for the decade ending on 30th June 2008.” The numbers were adjusted for inflation as well. By far the largest proportion of Americans’ stock investments are held in companies that make-up the S&P 500 Index.

Incidentally, if you account for the declining value of the dollar internationally, then performance of the S&P 500 delivered a negative real return of about -20 to -40% over the past 10 years! And Americans investing in S&P 500 companies did also participate significantly in the growth of foreign market as well. Such revenues grew rapidly to around 40% of total S&P 500 sales during this period.

Therefore Americans planning to retire in the next few years cannot rely on the stock market to replicate its gains seen between 1980 and 2000, to fund their retirement. They simply have to save more and place some of those savings away from the stock market. (Note: I do not anticipate Americans abandoning stocks. And there will be some market sectors that will do very well even if the broad market struggles.)

Boomers also have to question the ability of the U.S. government to fund their medical needs and pensions in retirement, as the U.S. government is in one heck of a hole – a hole of around $70 TRILLION! The enormity of this funding gap cannot be easily grasped. But let us try. In an article, U.S. ‘fiscal gap’ paving the road to meltdown, by Derek DeCloet in the Canadian Globe & Mail he states, “To earn $70-trillion in profit, you’d need 1,723 companies the size of ExxonMobil; $70-trillion would be equal to the annual sales at 1.35 million Wal-Mart stores. [Now that’s]… not the size of the U.S. government’s debt, though. It’s the shortfall between its projected future revenues and what it plans to spend (in today’s dollars).”

It is evident from the U.S. government’s financial position that its promised benefits to its citizens could be cut significantly – while substantially raising taxes as well. In such an environment boomers have no other option but to urgently save a heck of lot more now.

A new consciousness arising bringing balance to spending and saving
Americans, whether they be boomers or from generations X, Y and Z, are at the cusp of a new consciousness. They will bring a new balance to their material life and inner desires. The rapidly changing financial picture together with a fundamental shift in their consciousness concerning what is important in life, will place a renewed emphasis on savings. In years to come, this will be seen as a great turning point for the American economy, a turn towards a more balanced Enlightened Economics.

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• An incendiary mix! Inflation, CPI and the U.S. Federal Reserve

The U.S. Consumer Price Index (CPI) does NOT measure inflation
It is stunning how confusion reigns on the subject of inflation. Simply put: the Consumer Price Index (CPI) does not measure inflation. It tries, imperfectly, to measure the cost-of-living. Inflation and cost-of-living are not the same thing! As elite economists from Nobel Laureate Milton Friedman to the Bank of England’s Mervyn King comment, inflation is a monetary phenomenon. It is evidenced by excessive expansion of the money supply which exceeds economic growth. Therefore, the basis for higher prices in an economy is ‘too much’ money.

One measure of current U.S. broad money supply shows it growing at an annual rate of over 16%! However, there is considerable debate as to what money supply measure best links it with inflation. (I suspect that for developed countries, we might see credit expansion playing a much more important role in understanding the inflationary process than is currently appreciated. But that is for another post to research.)

Most people believe the CPI measures a fixed basket of goods and services over time. That is again, incorrect. It used to be the case, but not anymore. The current CPI basket of goods and services is constantly changing according to what bureaucrats think people are buying, and by numerous statistical alterations they deem ‘appropriate.’

How the U.S. Bureau of Labor Statistics (BLS) modifies the CPI to show tame inflation
The kind of huge modifications the U.S. CPI is subjected to include the following:

• Substitution of products. Should prices rise, it is inferred people will substitute with something less expensive.
• ‘Hedonic’ adjustments. If computers’ performance doubles, the relevant index component is halved.
• Weighting changes of index components. If an item becomes suddenly expensive, it may receive a smaller index weighting.
• Chain-weighting. Applies to some ‘versions’ of the CPI. This smoothes-out sudden price changes over many months and means indexes using this are always ‘behind-the-curve.’
• Intervention analysis/seasonal adjustments. Bureaucrats adjust index components according to historical seasonal variations, whether warranted in the current year or not. (See: The Government’s Statistical Whopper of the Year, by Robert P. Murphy.)

Hence, the BLS is able to manipulate the CPI to whatever doctrine holds sway at the time. Prior to about 1980, there actually was a fixed basket of goods and services that comprised the CPI. It did a much better job of measuring inflation caused by monetary expansion. But politicians and some academics did not like this as they said it overstated the actual cost-of-living. For instance, they figured that if beef became expensive, people might buy chicken, and so on, thereby reducing living costs, and thus effectively lowering the index.

Of course, these types of changes also inferred lower living standards. But no politician, or a bureaucracy headed by a political appointee such as the BLS, would want to say that!

CPI inflation over the past year: using 1980’s configuration, nearly 12%; using current methodology, 3.9%!
So around 1980 the CPI began to be massively modified and thus began the trek of divorcing it from monetary inflation. The difference in numbers between the 1980s CPI inflation measure and today’s cost-of-living CPI is extraordinary! John Williams at http://www.shadowstats.com/alternate_data shows that for April 2008, the CPI using 1980s methodology shows inflation over the past year of close to 12%; using CPI (CPI-U) as constructed today it is just 3.9%!

There is no doubt that the ideal of trying to get a consumer price index that reflects the reality of consumer buying behaviour is a good one. But to rely on the current CPI as a means of determining U.S. inflationary pressures so as to modify its monetary policy, is, at first glance, illogical. However, there is something else going-on here.

The Federal Reserve uses current CPI to fool the world in supporting U.S. economy and artificially high bond, stock prices
The U.S. Federal Reserve often cites the CPI as being very influential in shaping its monetary policy. From the foregoing this seems to be a very strange policy. When viewed through a political lens and the need to maintain confidence in the U.S. economy though, it makes sense to try to fool the world at large that inflationary pressures are minimal within its economy.

The U.S. economic problems are so big that if the Federal Reserve and other government agencies came clean on the true rate of inflation, we would see:

• U.S. economic growth would be shown to have been negative for several years now (real GDP growth rate = nominal growth less inflation)
• Bond yields would soar
• Stock market could rise in highly inflationary environment or crash should deflation take-over
• U.S. government deficit rocket higher
• Severe economic downtown. Perhaps a depression

As consciousness rises investors everywhere will begin to understand the distinction between U.S. monetary based inflation that is in the double digits, and a highly stylized, theoretical, consumer price index that minimizes the monetary inflationary threat. Prices of everything will then be re-set accordingly.

There is huge danger ahead should the U.S. monetary and credit expansion continue unabated. The excess funds will find their way into more asset classes and lead to further big asset bubbles – and busts. Commodities anyone! Oh, what an incendiary mix!

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• Cultural Creatives to Dominate in the Age of Enlightened Economics

For many years I have envisioned the possible psychological archetype of individuals in the coming ‘Enlightened Economics’ era. After much thought and research, I believe it is likely to resemble that of what sociologist Paul Ray calls the “Cultural Creative.” He coined the term back in the 1990s after performing two extensive surveys on Americans’ psychological values for the U.S. Environmental Protection Agency (EPA) to help understand and categorize Americans’ values to assist in the development of their environmental policies.

Who are the Cultural Creatives (CCs)?
In 2000, Dr. Ray co-authored with Sherry Ruth Anderson the book, Cultural Creatives (CCs), where they describe CCs as caring “…. deeply about ecology and saving the planet, about relationships, peace, and social justice, about self-actualization, spirituality, and self-expression.” They suggested that in the year 2000 there were more than 50 million CCs in America (about 25 per cent of the U.S. adult population) and a further 80-90 million in Europe. In a private conversation I had with Dr. Ray in 2002, he indicated that CCs could dominate western populations as early as 2020. I believe a case could now be made that this will occur much earlier than that.

Spiritual and personal development were at the centre of the values of the founding ‘core’ CCs. Referring to the early development of CCs, Dr. Ray and Ms. Anderson state, “As the ranks of beginners kept growing [in the 1960s], hundreds of thousands stayed with the process and went deeper. By the 1980s, the ‘movements’ numbers had swelled to a million or so, and by the 1990s, tens of millions were involved… But the consciousness movement-full of contradictions, shallow and deep, bubbling with new developments-is still in the phase of accelerating growth.”

CCs imbibe the values of Enlightened Economics
As explained in my various posts (The Missing Ingredient in Economics — Consciousness; Retiring the GDP (Gross Domestic Product, etc.) the fundamental shift I envisage in individual consciousness is towards that of global ecology, spirituality and social justice. This fits very well with the definition of CCs.

Though Dr. Ray has not completed further surveys in recent years as to the growth of CCs in western or global populations, it is clear from the enormous escalation of interest in green products and services, the environment, ethical investing, corporate social responsibility, spirituality, etc., that the numbers in the CC camp are growing significantly.

The ranks of the CCs are being filled from a group Dr. Ray refers to as ‘Moderns.’ The Moderns are the governing group in western societies. Their primary values concern money and status.

As the Moderns decline, the CCs gain
In the U.S., Moderns number close to half of the population. Dr. Ray and Ms. Anderson in their book explain the role of Moderns as “… the normative culture found in the office towers and factories of big business; in banks and the stock market; in university science labs and high tech firms; in hospitals and most doctors offices; in mainline churches and synagogues; in the ‘best’ schools and colleges …and most ‘mainstream’ and newspaper articles. The standard we take for granted, the rules we live by, are made by and for Moderns.”

However, the Moderns are declining in number as their values, focusing on financial materialism, status and lack of altruism, are under attack from both within and outside of their group. Increasingly, such values alone are seen as insufficient to meet the challenges of our world. The shenanigans on Wall Street – with the sub-prime mortgage and derivative fiascos and the gross irresponsibility of corporate elites – are some of the many reasons encouraging countless Moderns to re-align their values. Thus, unknowingly, they convert to the ranks of the CCs.

The expected era of Enlightened Economics necessitates a psychological archetype that reflects the demands of a new global epoch. This new epoch requires values depicting openness to the unfamiliar; a sense and inner experience of the unity of all things; and a deep caring for nature, the environment and humanity. And it also includes a realization that a new vision of global economics is critically needed. Cultural Creatives (CCs) heading to be the majority in numerous countries, imbibe these qualities. As such, their psychological archetype is the one I believe will dominate in the forthcoming age of Enlightened Economics.

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• Retiring the GDP (Gross Domestic Product)

The GDP statistic has to be retired. It is like an old shoe that no longer fits. GDP is fatally flawed as a measure of economic and societal well-being and economists know it. Yet it is universally used to compare living standards and economic growth like one compares sports scores. Furthermore, as each nation compiles it a little differently, especially regarding the inflation ‘deflator’ component, such comparisons are nonsensical. What is exciting is that there are some old and new indices getting attention that could replace the GDP. This is most welcome.

Alternatives to the GDP
Technically, GDP is the total market value of all final goods and services sold in an economy in any particular time period. As we progress in an era of Enlightened Economics, it is destined to be superseded by new indices geared to more accurately measure affluence, sustainability and quality of life, generally. Such indices include the Index of Sustainable Economic Welfare (ISEW), the Genuine Progress Indicator (GPI), and variants of them. Other intriguing indices include the Calvert-Henderson Quality of Life Indicators, the UN’s Human Development Index, and the Invincibility Index. The common thread in these indices is that as well as including economic activity, they also account for societal and environmental factors related to real human development – which the GDP does not.

The GDP statistic should be retired because…
• According to economist Clifford Cobb and colleagues, “Much of what we now call the growth of GDP is really just one of three things in disguise: (1) fixing blunders and social decay from the past [paying for pollution, costs of crime, etc.]; (2) borrowing resources from the future [GDP excludes the costs related to farmland depletion, water, other resources]; or (3) shifting functions from the traditional realm of household and community to the realm of the monetised economy [i.e. eating out, rather than at home].” (Text in parenthesis has been added for additional clarity.) For a fuller explanation, see “What’s wrong with the GDP.”

• Losses associated with natural and man-made disasters are not deducted from the GDP. For instance, Hurricane Katrina brought mass devastation. Yet the enormous economic losses were not deducted from GDP. But the clean-up costs were added though!

• GDP does not account for the value of non-monetary, economic, transactions. Such activities would include elder care by family members, and volounteer activities. In 2002, the International Monetary Fund (IMF) found that such activities represented the following shares of economic output: up to 44% of GDP in developing nations, 30% in transition economies, and 16% in Organization for Economic Cooperation and Development (OECD) economies (Schneider and Enste, 2002). See The Genuine Progress Indicator 2006.

• GDP was initially created to measure WWII wartime production. Its principal creator Simon Kuznets cautioned that “[t]he welfare of a nation can scarcely be inferred from a measurement of national income” (Kuznets, 1934).

- There is even evidence that a focus on GDP at the expense of other quality of life indicators can lead a society to a false sense of worth and even create unhappiness. In The Loss of Happiness in Market Democracies published in 2000, Emeritus Professor Robert Lane of Yale University compiled exhaustive research data showing the relationship of GDP to increasing unhappiness. He states, “Amidst the satisfaction people feel with their material progress, there is a spirit of unhappiness and depression haunting advanced market democracies throughout the world…” From his perspective, the rigors of modern market economies increasingly create family and relationship break-ups with subsequent loss of companionship and happiness. Acknowledging this trend, the World Health Organization recently predicted that by 2020, depression will be the 2^nd leading cause of disability, just behind cardiovascular disease. (However, with rising consciousness, I believe this trend will be reversed.)

GDP is short-sighted accounting. Things that bump-up GDP in the short-term often have harmful long-term human and financial consequences and costs.

From the foregoing it is clear that the GDP statistic has little relevance as a measure of our present day material and social well-being.

GDP provides a false sense of progress
Comparing the GDP to GPI (Genuine Progress Indicator) numbers illustrates how false is the sense of gain with the GDP in regard to our human condition. Look at this chart comparing the real (inflation adjusted) US per capita GDP and GPI growth between 1950 and 2004. Note how the GPI figure significantly lags GDP. It suggests that when items such as resource depletion, crime costs, and volounteer sector costs,’ etc., are accounted for, the per capita net benefit of a rising GDP is fully negated.

Source: (c) 2007 Redefining Progress

Retire the GDP now
Some of the ways social and non-market costs are included in the ISEW, GPI, etc., are definitely controversial. Perhaps for these reasons such indices have not as yet achieved common usage. But the GDP, created for the very reason of measuring WW11 wartime production, has been badly and wrongly used as a measure of our quality of life. Enlightened Economics demands the GDP be retired and replaced with more enlightened indices!

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• Pre-Conditions for a Sustained US Economic Revival

The US has achieved many periods of sustained and rapid economic growth. And it can do so again. However, as history demonstrates, a big bust results if the growth is spurred by excessive monetary and credit expansion. For the past 25 years or so the US economic expansion has followed the woefully excessive monetary and credit expansion script. The US will not be able to pull itself out of the present economic malaise without dealing with its inordinate levels of debt and ‘exponential’ credit growth. 

It is rather sad when most economists and investment industry professionals do not talk about the enormity of the debt and credit expansion problem. Unfortunately, it seems these ‘experts’ are either told to shut-up, prefer to overlook the obvious, or to simply lie about it being a problem! After all, what bank economist wants to tell his bank that its customers should reduce their borrowings, and thereby reduce the bank’s lending and subsequent earnings! More than likely the bank’s stock price would plummet. There is simply no incentive for most establishment economists to be truthful and every reason for them to lie. 

For the US to experience a true long-term economic revival, I believe four things need to happen. 

1. US debt growth will have to about match, dollar for dollar, GDP and income growth.
Presently it takes around $6 of new debt to create $1 increase in GDP and $4.75 of new debt for every $1 increase in national income. This is bubble territory. Look at this historical chart showing the explosive growth of America’s debt in relation to its national income.

Source: Michael Hodges America’s Total Debt Report

If income grows slowly while borrowing grows rapidly, eventually there is a solvency problem. That is where the US is today. If the borrowing were primarily to increase overall productive capacity – the increase in production would have created greater income to help offset massively increased borrowing. But this has not happened. Much of this bloated US debt load is concentrated in the financial, mortgage and government sectors, and for the financing of its trade deficits. The debt contraction will be particularly acute in areas related to the financial and mortgage industries and generate extraordinary difficulties for the economy at large. 

2. Debt to GDP ratio has to come down by around one-third
Debt at around 350% of GDP and growing 50-100% faster than the rate of GDP growth for more than 25 years – is utterly unsustainable. Following on from point 1 above, the US is basically beginning to experience an insolvency problem. Credit availability is declining while default rates soar. As a result, it has to reduce its overall debt burden. Nations frequently resort to inflating their money supply to deal with their debt burden, as Germany did in the early 1920s and Zimbabwe is doing today. So with the significantly increased amount of money swashing around, debts not being indexed to the growth of the money supply, are more easily paid off. Present moves by the US Federal Reserve now indicate that this is the path they have chosen. According to shadowstats.com, the broadest measure of US money supply is growing at an annual rate of around 17%! 

3. Personal savings rates have to move beyond 10% per annum– from around zero at present.
High growth economies have high savings rates. It is that simple. The savings go towards spurring productive capacity – rather than to consumption – and produce fast income growth. In most years between 1952 to the late 1980s, the US enjoyed a personal savings rate above 10% of income. (See this graph by the Bureau of Economic Analysis.)

4. The above 3 conditions have to persist.
It is no secret as to what are good, or bad, macro-economic conditions. The above are key conditions that have to be met to ensure true, long-term, high growth macro-economic performance. 

Summary
The message is that the US must significantly reduce its overall debt levels, avoid building-up new debt in excess of GDP or income growth, and for individuals to start saving again. I have no-doubt that these conditions will be met. But before they are met the US is likely to experience an extended period of rolling recessions over many years. And a depression cannot be ruled out either. During this process I expect to see among Americans a transformation to higher consciousness and a growing understanding of economics and its relationship to natural law and the environment. Americans, and people everywhere, will come through this much wiser. A new global Enlightened Economics framework will be created and form the basis for improving living standards and quality of life for all in our world in the years to come.

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• Out of the Ashes. A Global Central Bank!

Our financial overseers will create a world central bank in the next few years. Growing higher consciousness in the world will enable it to become a reality. This bank will have a mandate to monitor, regulate, and maintain global currency, credit, and debt issuance. It will ensure that growth of these activities roughly matches global economic output. It will come about as the chaos and inadequacies engendered in our present monetary system become evident to everyone and a world central bank seen as the best solution.

Individuals and groups in financial markets everywhere, lacking inner fulfillment, have demonstrated inordinate greed resulting in reckless financial games and gambling – are bringing the financial system to its knees.

Such mismanagement in the financial system, I believe, will require the new world central bank to disallow banks everywhere from continuing in unfettered debt creation and speculative excesses. In search of ever higher returns, banks created overly lax lending standards, highly leveraged loans, obscure financial entities bearing major financial risks unconsolidated in their financial statements, and generally ran down the quality of their assets and reserves to unsafe levels.

‘Shadow banking’ system larger than conventional banking
All the while an even bigger, massively leveraged, totally unregulated, thinly capitalized, ‘shadow-banking’ system was allowed to balloon by bank regulators. And it is now in the process of imploding! Bill Gross, managing director of PIMCO, the world’s largest bond fund, said this recently about the shadow banking system: “Our modern shadow banking system craftily dodges the reserve requirements of traditional institutions and promotes a chain letter, pyramid scheme of leverage, based in many cases on no reserve cushion whatsoever.”

Due to the enormous growth of irresponsible central bank and banking activities globally, plus the vast, mushrooming credit creation of the shadow banking system – the world’s money supply is expanding out-of-control.

Unprecedented money supply growth creates inflation as bad as 1970s
Globally we see that, “China [is] registering an 18% plus growth in money, India 22.4% a year growth, Singapore 14%, Britain up by 12.3%, Western Europe 11.5%, Australia 16%, Canada 13%, and Saudi Arabia 22%!” So says The Mogambo Guru, Richard Daughty. These are ‘broad money supply’ figures. John Williams of www.shadowstats.com shows the US broad measure of money supply, as of early February 2008, increasing at annual rate of 16.8%. (The US Federal Reserve stopped publishing this measure in March 2006 claiming it costs too much to produce. Many economists suspect that they just wanted to hide the ramping-up of the US money supply.)

Even Marketwatch’s chief economist, Irwin Kellner, is concerned about US money supply growth. He said recently, that, “The rate of growth for highly liquid funds which the St. Louis Fed calls MZM [i.e. physical money, checking and money market accounts, etc.]… soared by an annual rate of 22.7% between December 24, 2007 and February 18 of this year.” He adds, “… it has created a whole lot of inflation.”

The link between an expanding money supply and inflation is firmly established. As the Bank of England’s Governor, Mervyn King quoting a highly respected study, said, that “Over the 30 year horizon 1968-98, the correlation coefficient between the growth rates of both narrow and broad money, on the one hand, and inflation, on the other, was 0.99.” Thus in the words of Milton Friedman, the recently deceased Nobel Economics prize winner, “… inflation is always and everywhere a monetary phenomenon.”

In the US, consumer price inflation using the politically biased, understated, consumer price index (CPI-U) is in January 2008 up 4.3% from a year earlier. But using the CPI methodology as of 1980, it is almost hyperinflationary at close to 12%! Inflation in China is now running at 8.7%, while in the EU and the UK, though more moderate at 3.4% and 3.1% respectively, it is picking-up significantly and well above their respective central bank targets.

The foregoing suggests that the present global monetary and financial system is reaching a state of extraordinary instability. The danger is the possibility of rapidly growing, unstoppable inflation culminating in a hyperinflationary episode such as is now occurring in Zimbabwe. Or, a threat of a deflationary bust similar to the Great Depression.

Higher consciousness the only real answer
The only real answer to such economic threats is higher global consciousness. This, I am convinced, will gain traction. (See my post, The Missing Ingredient In Economics — Consciousness!). In future years, this higher consciousness will, amongst other things, first manifest itself by allowing our financial overseers to see the need for, and create, a world central bank.

In ages past central banks utilized gold to help create monetary order. A new world central bank might well find a role for gold again, but in an updated, modern form. I will write about this in another post.

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• Free Markets Are Rare Indeed

Most major markets influencing business and consumer decisions are not ‘free.’ They are manipulated by governments to varying degrees. Governments feel that it is for ‘social good’ that they intervene. Here is a brief list of key markets and descriptions of the government interventions. You can decide about the worthiness of these interventions yourself.

Currencies
The world’s most important currency, the US dollar, does not really trade freely. The US Treasury established in 1934 the ‘Exchange Stabilization Fund’ specifically to ‘manage’ the US dollar exchange rate. Its dealings are secret. In 1987, 1998, 2003/4 and likely at many other times, the treasury departments and possibly central banks of the US, Japan, the EU and other countries collectively intervened to manipulate currency values. China has pegged its currency, the renminbi, to the US dollar for many years. As the US complains about Chinese currency manipulation, it needs to come clean about its own efforts first.

I suggest that currency traders and speculators should not be blamed for strong currency movements. They are nearly always reacting to bad or anti-market policies of governments and central banks and generally reflecting the ‘collective consciousness’ of the global financial community.

Stock markets
Stock markets are not free of government intervention either. After the 1987 US stock market crash, President Reagan established the Working Group on Financial Markets, (the ‘plunge protection team’), to effectively stop stock market crashes. How and when it operates is again secret. Journalists and others have tried for years to get information of the Working Group’s meetings and activities, but to no avail. On January 22, 2008, it was believed that the US Federal Reserve purposely reduced its Federal Funds rate by 0.75% just before the US Dow Jones Index was due to open 600 points (over 5%) lower! This move potentially saved the US stock markets from a major crash that day. Here we have a clear – and public case – of market intervention for the purported ‘public good.’

Interest rates
The US Federal Reserve, the EU Central Bank, Bank of Japan – in fact nearly all central banks regularly announce interest rate changes to short term securities. And through their buying and selling of government bonds, they also influence rates on all longer-term securities.

Unfortunately, a largely economically illiterate public clamours for manipulated, low interest rates. Central banks generally oblige, despite them supposedly being mostly ‘independent.’ Artificially induced low interest rates then create excessive borrowing, such as we have seen in housing. A housing bust follows and everyone blames the government – rather than themselves! (Question: who is really best able to set interest rate policy? Is it a country’s central bank or the free market?)

Oil
By controlling over 40% of global oil production, OPEC (the Organization of Petroleum Exporting Countries), stage-manages global oil production and prices. Not only do they control production levels, but they have been free to cite their oil reserves’ data with no independent verification of what they do actually have in the ground. And there are many reasons – as Matt Simons, eminent oil analyst, suggests – why we need to be sceptical of the Gulf States oil reserve numbers. Again, with the reserves being unaudited by any reputable international agency, OPEC is able to abnormally influence oil prices.

Food
Governments influence agricultural markets to a massive degree. Annual agricultural subsidies in the EU amount to about $75 billion; in the US $55 billion. These subsidies with those of many other countries dramatically distort global agricultural production and prices. The Doha round of World Trade Organization (WTO) free-trade talks floundered largely because developing countries demanded that agricultural trade distorting practices be reduced and eliminated. The developed countries resisted and the trade talks collapsed. For much of the developing world the one area where they could compete – and potentially bring them out of poverty – is with agricultural exports, even with today’s significantly increased transportation costs.

Ethanol and biofuels is another area where government intervention to support markets has caused dramatic negative market dislocations. Food cropland and food crops now going towards the production of ethanol and biofuels has resulted in significantly increasing food prices around the world. In numerous developing countries it has contributed to food shortages and riots.

Two final thoughts…
Unfair economic or financial advantage is often gained by those who have inside knowledge of where and when governments intervene. Indeed, they can ‘front-run’ the governments’ actions and make huge fortunes without the public ever knowing what is going-on. This probably occurs especially in stock markets, where it might be welcomed by the governments who see it aiding their efforts to manipulate markets.

This discussion demonstrates that society does not have, nor apparently really believes in, wholly free markets at this time. Why? It feels that individuals cannot be trusted to do the ‘right’ thing. Yet, as we see here, governments frequently do not do the right thing either! In other posts I demonstrate that high consciousness individuals are much more likely to do the’ better’ thing. Such individuals will allow truly free markets to function and will create affluence, environmental sustainability, and fulfillment, beyond anything envisaged today. To turn things around and to begin to understand how free markets with higher consciousness individuals can work, see these posts Free Markets Need ‘High Consciousness’ Individuals and The Missing Ingredient in Economics – Consciousness! 

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• Free Markets Need ‘High Consciousness’ Individuals

Adam Smith in 1776 said in his “Wealth of Nations” masterpiece that prices in a free market are as if determined by an ‘invisible hand.’ This invisible hand in free markets exists due to innumerable individuals voluntarily buying and selling goods and services by mutual consent. Such exchanges are at prices and quantities unhindered by monopolistic, oligopolistic or governmental influences. I believe that this ideal can only be optimally attained when individuals are fully free and fulfilled within themselves, enjoying higher consciousness.

Critics of free markets today, such as Joseph Stiglitz, Nobel Economics Laureate, say that true free markets can only exist if pertinent knowledge is fully and equitably distributed among all market participants. Now he says since this is rarely the case ‘free markets’ usually need some form of government regulation. This is a popular proposition, witness the increased US Federal Reserve’s tightening of loan standards for sub-prime mortgage loans. (I refer again to this below.)

But suppose markets can be made more efficient and uniform in the way knowledge about them is promulgated? Today, we have the internet. This allows for the mass transmission of knowledge. As the internet becomes increasingly ‘dense’ in terms of knowledge and society ever more sophisticated in its use, the argument about knowledge in any given market not being widely disseminated becomes less plausible.

Another criticism which I see regularly and is particularly apt, say in regard to the sub-prime mortgage mess, is this: That many individuals lack the knowledge and/or intellectual ability in distinguishing fact from fiction when making purchases, and therefore need ‘protection’ by the government or some other party. Were there no means of counteracting this insufficiency in individuals, those proposing such intervention would have a valid point. However, there is a way of counteracting this human insufficiency and that is because our individual and collective consciousness is now undergoing an extraordinary transformation where these deficits are being righted. This development is a core premise of this Enlightened Economics blog, integrating the knowledge of consciousness into economic theory.

The new evolving theory of Enlightened Economics will demonstrate that as higher consciousness permeates society, individuals will have the required insight and intellectual facility for optimal purchasing decisions, without much need, if any, of government regulation. Thus, with individuals enjoying higher consciousness free markets can rise to their optimal state and produce affluence and fulfillment for all.

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• Is the Amazing US Debt Productivity Decline Coming to a Bad End?

For decades, each dollar of new debt has created increasingly less and less national income and economic activity. With this ‘debt productivity decline,’ new evidence suggests we could be near the end-game in this economic cycle. American collective consciousness will need to change to accept the new reality.

Getting less and less economic benefit from each dollar of new debt is becoming an enormous and onerous problem for the US. Quoting Michael Hodges in his Total America Debt Report, “In 1957 there was $1.86 in debt for each dollar of net national income, but in 2006 there was $4.60 of debt for each dollar of national income – up 147%. It also means this extra $2.74 of debt per dollar of national income produced zilch extra national income. In 2006 alone it took $6.32 of new debt to produce one dollar of national income.” (Underlining added.) See his chart below.

Source: Michael Hodges America’s Total Debt Report

According to Dr. Kurt Richebacher, writing for The Daily Reckoning, US credit expansion in 2005 was $3,335.9 billion and matched by nominal GDP growth of $752.8 billion, equalling $4.43 in new debt for each dollar of GDP growth. In 2006 total credit market debt increased $3.9 trillion while nominal GDP (seasonally adjusted) grew by $686.8 billion showing that it took $5.68 of new debt for each dollar increase in GDP. What must be noted is that for the thirty years prior to the late 1970s the credit-to-GDP ratio held steady around 1:1.4.

Exponential debt growth in relation to income and GDP growth stops at some point. I believe we could be there now. The following chart illustrates that US household debt service costs as a percentage of disposable income seems to have reached a plateau at around 14.4%.

Source: www.contraryinvestor.com…

And this chart shows US savings rates at around zero as a percentage of personal income.

Source: Michael Hodges America’s Total Debt Report

These three charts together indicate that US households may already have hit a ‘debt wall.’ That is, with no savings additional new expenditures require additional debt.

It is no wonder that mortgage foreclosures, auto and credit delinquencies, etc., are rising dramatically. Americans have gotten to this point as they sought fulfillment almost exclusively in the material world around them.

It is possible that the US Federal Reserve and the financial system will continue to produce ever increasing amounts of debt relative to national income and GDP. This would only further exacerbate the decline in debt productivity. However, should this happen, watch out for much higher inflation.

In the years ahead many Americans will need to look more within themselves, rather than to material goods, to find personal fulfillment.

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